5 Lati (New Lat) – Latvia

In 2003, Latvia was in a period of significant economic transition, firmly on the path to European Union membership, which it would achieve in May 2004. The country's currency regime was a cornerstone of its macroeconomic stability. Since 1994, Latvia had maintained a fixed exchange rate, pegging the Latvian lats (LVL) first to the IMF's Special Drawing Rights (SDR) and then, in early 2005, solely to the euro. However, in 2003, the peg was still formally to the SDR, though it effectively shadowed the euro, which was the anchor currency for its future integration.

This fixed regime provided crucial stability, taming the high inflation of the early post-Soviet years and fostering foreign investment. It was managed by the Bank of Latvia, which committed to buying or selling foreign exchange to maintain the peg. The policy was largely successful, contributing to strong economic growth, but it also required strict fiscal discipline to avoid devaluation pressures. Latvia's current account deficit was widening in 2003, fueled by a consumer and credit boom, which presented an underlying challenge to the sustainability of the fixed rate.

Consequently, the dominant monetary policy discussion in 2003 revolved around the eventual adoption of the euro. With EU accession treaties signed, Latvia was obligated to join the European Exchange Rate Mechanism (ERM II), the "waiting room" for the euro, which required maintaining exchange rate stability for two years. Therefore, the fixed peg was seen not just as a tool for domestic stability but as a direct preparatory step for eurozone entry. The focus was on meeting the Maastricht convergence criteria, particularly controlling inflation and budget deficits, to ensure a smooth transition from the lats to the euro in the coming years.